Mega merger 'heralds more consolidation'

The merger of France's Unibail and Rotterdam-based Rodamco Europe to create the largest pan-European commercial property company is likely to be the first of a series of consolidations in the European property sector, according to analysts at JP Morgan.

'We remain of the view that there is more to come, but to be honest that is what the sector needs to remain interesting,' JP Morgan's property mid-cap team commented following the news of the merger of Unibail and Rodamco.

Although the move was presented by the two companies as a 'merger of equals,' the analysts said it was in reality a takeover of Rodamco by Unibail, as the latter bid 0.53 Unibail share for one Rodamco share. In addition Rodamco ceo Maarten Hulshoff is stepping down and Unibail's ceo Guillaume Poitrinal will take charge of the merged company. 'I believe there should be only one captain on a ship,' Hulshoff said.

The JP Morgan analysts said any doubt on the merger rationale could weigh on the share prices of both companies. The Unibail bid implied a 15% premium on Rodamco's closing price last week of EUR 108.44.

Future mergers would likely be similar share-for-share deals and not cash bids due to current share prices. But the analysts added: 'one should realise in this perspective that not every management is like Unibail...'

Poitrinal hinted Unibail may embark on more mergers as he said he wanted to play an important role in the eventual consolidation of the property sector in Europe.

The joint Unibail-Rodamco Europe conglomerate - as of yet without a name - will be valued at almost EUR 22 bn, the two companies told a press conference to announce the merger in the Netherlands on 10 April. Rodamco is the largest listed retail property company in Europe. The company owns and operates shopping centres in 20 major cities in 12 European countries, and its property portfolio is worth EUR 10 bn. Rodamco will control 49.7% of the new group.

Unibail is commercial property investment company mainly active in the offices, shopping centres and convention centres sector in France. Its property portfolio is EUR 10.9 bn. The company will control 50.3% of the merged company.

Analysts at merchant bank Kempen & Co suggested the exchange ratio was 'mostly beneficial' for Rodamco. The JP Morgan team agreed the 'merger' seemed to favour Rodamco in the short term.

'We see negatives for Unibail being a dilution of its growth profile as it has to share medium term profits on its development pipeline with Rodamco Europe shareholders. In addition Unibail will be subject to a dilution in focus as it will now also have Dutch, and CEE retail assets in the portfolio, while we believe the French retail market is still the most attractive.'

Describing the merger as predominately revenue driven, Kempen & Co noted Unibail did not expect any cost synergies. The target instead is more efficient operation of Rodamco's portfolio. 'In fact Rodamco brings the assets while Unibail brings in expertise,' Dick Boer of Kempen & Co said. This means that rather than continue to work with third-party developers, Rodamco will now be able to avail of development expertise inhouse to capture development premiums.

Longer term the new combination will benefit from full exploitation of the development potential of Rodamco's portfolio. The increased size will also enable the merged group to use increased portfolio size to offer shopping centre space in various countries. Unibail and Rodamco said international retail chains are reluctant to enter Europe due to its fragmented size.

JP Morgan's analysts said that the merger makes sense, but only because it is being carried out by Unibail. 'For the deal to be valuation neutral, we estimate 10% more rental growth from Rodamco's portfolio is required. This assumption seems fair, if one takes Unibail's track record into account.' The merger transaction is expected to be completed in June.